Like businesses, asset owners have varying commitments to improving corporate governance. “I’ve heard it again and again from company chairmen – that they write letters to their top 20 shareholders and get one or two responses,” says Frank Curtiss, head of corporate governance at Railpen, the £20bn UK pension fund.
Embedding sustainability risk analysis and engagement into investment processes, rather than making them a siloed function, is the major governance challenge facing investors, according to Summerfield. Focusing on the quality of engagement instead of the number of meetings held and committing enough people and attention to research and communications is vital.
USS’ six-person responsible investment team is tasked with assessing governance and sustainability risks in companies across all markets, including private equity and hedge funds, and briefing portfolio managers at the fund’s in-house team.
“Further work can be done to address these factors at the early stages of the investment decision-making process. We are working with the portfolio managers to develop a process which will aim to close this gap,” Summerfield says.
In 2010 the fund struck a voting alliance with Railpen. Now entering its fourth AGM season, the partnership shows how pension funds can unite to become more active shareholders.
Votes opposing management proposals are preceded by letters expressing the funds’ opinions or seeking more information.
“Not a lot of investors write to management. If they do, it’s nine months after the meeting, when the issue is stale,” Curtiss says. “We try to contact companies ahead of AGMs to hear what they have to say.”
Railpen includes stewardship in the mandates it signs with fund managers hired to manage the scheme’s assets. These equity, bond, private-equity and hedge fund managers are at different stages of implementing responsible investment. “Some are good. Some are better. Some have work to do,” Curtiss says.
Many take it seriously because they perceive governance and sustainability as part of investment risk.
“Fund managers might not think about it in terms of engagement and ESG, but they do it when investing in companies and holding management to account. We’re less worried about the terminology as long as people do the right thing.”
Stewards on show
USS, Railpen and GO, as part of the Investor Stewardship Working Party, have helped communicate ways for investors to close the gaps between governance aims and practice.
Asset owners need fund managers to clearly say how steadfastly they will – or will not – engage companies. Each must show “how far, and in what particular areas, it intends to exercise stewardship”, according to the group’s 2020 Stewardship report, published in March 2012 after discussions with groups including the Financial Reporting Council, which oversees the UK Stewardship Code, and the Investment Management Association, National Association of Pension Funds and the Institute of Directors.
Companies should know what to expect and investors need to compare managers’ attitudes to governance.
“There is nothing wrong in NOT signing up to the Stewardship Code when an institutional investor has products that are not suitable, or is too small, or is a non-believer in the benefits of stewardship,” the report states. [Emphasis in original.] “There is a place in the market for trading and liquidity and we acknowledge that many investors will not seek in any way to be stewards.”
“Many fund managers have signed up to the Stewardship Code,” says Butler of GO. “But I defy you to go to 10 different fund managers’ websites and decide which does engagement better. It’s not possible.”
Proxy voting processes, which do not alert shareholders that their votes have been received or whether resolutions have been adopted or stood down, should also become more transparent.
“There is no accountability. It is an issue that the entire chain of intermediaries – proxy advisers, fund managers, custodians – must look at. There should be automatic confirmation that votes have been lodged,” says Caprasse of ISS.
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